Last week’s approval of bitcoin Exchange Traded Funds (ETFs) was quite an event. For a few days, our sector was the crown jewel of the financial ball, with more than $4.5 billion traded on Thursday’s debut. It’s truly amazing to consider how long it took to get a suitable ETF. Some things are worth the wait.
Cryptocurrency Market Reality Check:
2024 sees the cryptocurrency market grow, joining other larger asset classes. Despite the rocky and uncertain economic terrain over the past year, Bitcoin and Ethereum are strutting their stuff and becoming increasingly favored, serving as desirable alternatives to ordinary stocks and bonds. Asset allocators are taking note of 2023 performance, which means demand for Bitcoin and Ethereum is on the rise.
Spot Bitcoin ETFs – Don’t Ignore Them:
While it is not yet clear whether or not the launch week of the Bitcoin spot ETF was a “buy the rumor, sell the news” event, in the medium to long term it will likely mark a turning point in cryptocurrency adoption rates . Why?
Because it is a more familiar and regulated way to allocate capital in the cryptocurrency market. Take a look at Coinbase and MicroStrategy stocks in 2023: They have outperformed Bitcoin, and that’s no coincidence. These ETFs will open the doors for registered investment advisors (RIAs), pension funds and hedge funds to get in on the action. Additionally, investment banks will begin to design new products based on these ETFs, and the CBOE is awaiting approval to begin pricing options on these new ETFs.
Watch this space – it’s going to be a ride.
Inflows and large numbers:
Get ready for a tsunami of money entering the crypto scene. RIAs manage around $130 trillion, and a 1-2% portfolio allocation to digital assets via ETFs could send $1 to $2.5 trillion into the cryptocurrency world, roughly equivalent to the current market cap of the digital asset market.
Here’s the problem: this flow of money will mainly flow into Bitcoin and Ethereum. Sorry, altcoins, you may have to wait your turn for now. But the rise of Bitcoin and Ether should spill over into other digital assets as well, as native cryptocurrency investors profit from the majors and allocate capital into smaller tokens. This will put native cryptocurrency players in the driver’s seat of bitcoin’s dominance (see chart below), as they will be investors able to play on the basis and spreads between the majors and altcoins.
Macro factors in view:
Now let’s talk about recession and interest rates. If the US economy were to collapse at the end of 2024 due to rising interest rates, we will enter an accommodative period of the interest rate cycle and guess who will benefit? Yes, digital assets.
Bitcoin, with its digital scarcity, and Ethereum, with its increasingly deflationary post-Merge tokenomics, will shine in a world of growing deficits, government spending, and abundant fiat liquidity. But keep your expectations moderate. There will inevitably be volatile moments of low liquidity and deleveraging for digital assets.
Play smart with portfolio construction:
In 2024, forget about trying to predict where the market will go. Instead, focus on portfolio construction and position sizing. Price momentum indicators, such as CoinDesk Bitcoin and Ether Trend Indicators (BTI and ETI), can be useful inputs to moderate net exposure and manage overall market exposure.
If you’re craving some exposure to altcoins to take advantage of a bullish market, consider diversified exposure. Indices like the newly launched CoinDesk 20 (CD20) offer diversified exposure to altcoins, while capping major tokens (Bitcoin at 30%, Ether at 20%, respectively) to better manage market volatility and diversify potential asset risks. altcoins tied to specific token adoption rates and regulatory impacts. (More information on the CD20 is available at coindeskmarkets.com and Here.)
Preparing for Altcoin Season:
It’s time to consider tilting your portfolio towards altcoins while keeping a firm grip on Bitcoin and Ethereum. Altcoins shine when the rest of the cryptocurrency market moves ahead, and there is no denying their growth potential. But keep in mind the benefits of portfolio construction as markets never move in a straight line and there is always a twist in the story.
